Saturday, September 29, 2012

US repo rates spike

The US repo rates have risen to a 3-year high this week. The chart below shows the so-called General Collateral (GC) treasury repo rate. GC simply means that the borrower under the repo loan can post any treasury securities as collateral - as opposed to specific bonds.

Source: JPMorgan

JPMorgan attributes this increase to several factors.

1. Banks' total reserve balances at the Fed has declined recently.

Bank reserves (source: FRB)

Empirically it can be shown that declines in reserves corresponds to rising repo rates. Reserves will begin rising again as the Fed commences balance sheet expansion.

Source: JPMorgan

 2. Dealer holdings of treasuries (which are not prohibited under the Volcker Rule) have risen recently, increasing demand for treasury financing.

3. US money market funds, tired of extraordinarily low rates in secured lending (repo), have rolled some of their assets into unsecured US bank paper (commercial paper and CDs). This reduction in repo lending contributed to rising rates. Note that US money funds still prefer secured lending in Europe (discussed here).

4. Quarter-end generally corresponds to higher rates, as banks try to reduce balance sheets ("window dressing") for reporting purposes.
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